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Motion for Sanctions Granted Where Appellants Fail to Identify Reversible Error Below and Continue to Misrepresent Facts and Law

March 20, 2009

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Last Month at the Federal Circuit - April 2009

Judges: Bryson (dissenting), Linn (author), Prost

[Appealed from: N.D. Cal., Senior Judge Jensen]

In E-Pass Technologies, Inc. v. 3Com Corp., Nos. 08-1144, -1145, -1146, -1470, -1471, -1472 (Fed. Cir. Mar. 20, 2009), the Federal Circuit affirmed the district court’s conclusion that three related cases were exceptional under 35 U.S.C. § 285 and awards of attorneys’ fees. The Court also granted defendant-appellee Access Systems Americas, Inc.’s (formerly known as PalmSource, Inc.) (“PalmSource”) motion for sanctions against E-Pass Technologies, Inc. (“E-Pass”) for filing a frivolous appeal.

E-Pass is the assignee of U.S. Patent No. 5,276,311 (“the ’311 patent”), which is directed to a method and device for simplifying the use of a plurality of credit cards or the like. In 2000, E-Pass filed suit against 3Com Corporation and Palm, Inc. alleging infringement of the ’311 patent. During the course of litigation, the district court construed the term “electronic multi-function card” and granted SJ of noninfringement based on that construction. E-Pass appealed and the Federal Circuit substituted a construction of the “electronic multi-function” term and remanded for further proceedings in light of the new construction. E-Pass Techs., Inc. v. 3Com Corp., 343 F.3d 1364, 1365 (Fed. Cir. 2003) (“E-Pass I”).

E-Pass then filed two additional suits in the same court. In 2003, E-Pass filed suit against Visa International and Visa U.S.A. for infringement of the ’311 patent, and in February 2004, it filed suit against PalmSource, again alleging infringement of the ’311 patent. The district court grouped the cases together as related and subsequently granted SJ of noninfringement for all defendants. E-Pass again appealed the district court’s decision and the Federal Circuit affirmed. The Court agreed with the district court’s finding that E-Pass failed to provide evidence showing any defendant practiced all the steps of the claimed method. See E-Pass Techs., Inc. v. 3Com Corp., 473 F.3d 1213, 1221 (Fed. Cir. 2007) (“E-Pass II”).

Following entry of judgment but prior to the E-Pass II decision, the district court deemed each of the three actions exceptional under 35 U.S.C. § 285 and awarded attorneys’ fees. The district court did so based primarily on the inadequacy of E-Pass’s prefiling investigations and its repeated misconduct throughout the litigation. On appeal, E-Pass challenged the district court’s exceptionality findings and awards of attorneys’ fees. PalmSource moved for sanctions, arguing that E-Pass’s appeal was frivolous with regard to PalmSource because E-Pass failed to identify a reversible error of the district court and made misrepresentations to the Court.

The Federal Circuit first reminded that “[i]f a court of appeals determines that an appeal is frivolous, it may, after a separately filed motion or notice from the court and reasonable opportunity to respond, award just damages and single or double costs to the appellee.” Slip op. at 3 (quoting Fed. R. App. P. 38). The Court stated that an appeal can be “frivolous as filed” and/or “frivolous as argued.” An appeal is frivolous as filed “when an appellant grounds his appeal on arguments or issues that are beyond the reasonable contemplation of fair-minded people, and no basis for reversal in law or fact can be or is even arguably shown.” Id. at 4 (quoting Abbs v. Principi, 237 F.3d 1342, 1345 (Fed. Cir. 2001)). An appeal is frivolous as argued “when an appellant has not dealt fairly with the court, [or] has significantly misrepresented the law or facts.” Id. (alteration in original). The Court found E-Pass’s appeal, as it relates to PalmSource, frivolous at least because E-Pass failed to explain how the trial court erred or to present cogent or clear arguments for reversal. The Court also found that E-Pass made significant misrepresentations of the record and the law.

With regard to E-Pass’s failure to clearly or cogently identify a ground for reversal of the district court’s decision as to PalmSource, the Court first noted the district court’s findings that E-Pass’s case against PalmSource was weak and that E-Pass engaged in litigation misconduct, for example, by changing allegations of infringement, refusing to supplement infringement contentions, and opposing SJ on the basis of lack of discovery coupled with a failure to take discovery it had requested and received. The Court found that the totality of the circumstances led the district court to find the action against PalmSource exceptional and award attorneys’ fees.

The Court also found that E-Pass’s appeal brief virtually ignored PalmSource, focusing almost entirely on the other defendants-appellees. The Court noted that, even after PalmSource put E-Pass on notice of the alleged frivolousness of E-Pass’s appeal by requesting sanctions in its reply brief, “E-Pass still failed to clearly or cogently explain in its brief why the district court’s findings in the PalmSource litigation were clearly erroneous or an abuse of discretion.” Id. at 6.

Turning to E-Pass’s misrepresentations to the Court, the Court first addressed E-Pass’s prefiling investigation, about which the district court found that there was at least “a serious question.” Despite the district court’s misgivings and finding of exceptionality as to PalmSource, the Court noted that E-Pass “boldly contended” that the district court specifically found that E-Pass’s prefiling investigation was sufficient to avoid making the case exceptional. Id. at 7. The Court concluded, however, that the district court found only the prefiling investigation of another of the seven defendants-appellees sufficient, and that any question as to the sufficiency of E-Pass’s prefiling investigation was overcome by E-Pass’s numerous acts of litigation misconduct. Id. at 8.

Next, the Court discussed E-Pass’s representation regarding the legal standard for exceptionality. E-Pass stated unequivocally that the standard for an exceptional case finding is “whether the case was brought in subjective bad faith and the litigation was objectively baseless.” Id. (quoting E-Pass’s Reply Br. at 29). The Court observed that this is not the law and that E-Pass left out an important condition. The case cited by E-Pass states that, “[a]bsent misconduct in the litigation or in securing the patent, a trial court may only sanction the patentee if both the litigation is brought in subjective bad faith and the litigation is objectively baseless.” Id. at 9 (quoting Serio-US Indus., Inc. v. Plastic Recovery Techs. Corp., 459 F.3d 1311, 1322 (Fed. Cir. 2006)). Because litigation misconduct was a central issue in the case, the Court found it “difficult to view E-Pass’s omission of the critical portion of the legal standard applicable to it as anything other than an attempt to mislead the court.” Id.

Finally, the Court held that even if E-Pass had made a nonfrivolous, yet unmeritorious argument, that would not change the Court’s determination that the appeal as a whole is frivolous. The Court stated, “The tactics employed by E-Pass in this appeal, including both the misrepresentations made and the failure to cogently identify any reversible error of the district court, far outweigh any non-frivolous argument that may be lurking in its briefs.” Id. at 10.

In a dissenting opinion, Judge Bryson did not take issue with most of the majority’s criticisms of the appellant’s presentation but would not have imposed sanctions. Although Judge Bryson acknowledged that E-Pass did not clearly identify issues on appeal that apply to PalmSource, he identified one issue as to which E-Pass specifically named PalmSource and as to which it was reasonable for E-Pass to pursue an appeal. Specifically, Judge Bryson observed that E-Pass asserted that the district court’s award of attorneys’ fees to PalmSource starting from the inception of their respective cases was unreasonable and an abuse of discretion. E-Pass argued that, instead of that fee award, the district court should have apportioned the fees and awarded only those fees incurred after E-Pass should have dropped the suit. Judge Bryson found this argument and its specific identification of PalmSource not so frivolous as to warrant the imposition of sanctions.